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...the quarterly period 1973-98. The econometric analysis exploits the theory of cointegration, given the obvious nonstationarity of the data. Estimates of the cointegrating relations are obtained using Johansen's multivariate procedure. Evidence of stability of the cointegrating space is examined using Hansen's [1992a] tests. Short-run dynamic modelling is accomplished using the error-correction technique, and the stability test results are obtained using Hansen [1992b] tests. In conformity with theoretical considerations, the results indicate that increases in the exchange-rate volatility exert a significant negative effect upon export demand in both the short-run and the long-run in most of the countries studied. These effects may res ult in significant reallocation of resources by market participants. (JEL F14, F31)
Introduction
There has been widespread concern among financial market participants, trade economists, the popular press, and policymakers over the high degree of volatility of most major exchange rates since the inception of floating rates in March 1973. Much of this concern stems from the adverse effects of increased uncertainty from high volatility in exchange rates on foreign trade. Such adverse effects from exchange-rate volatility on foreign trade have contributed to the abandonment of flexible exchange rates and to shifts toward systems of exchange rate management such as the European Monetary System and the West African Monetary Union. (1) Work by DeGrauwe [1988, p. 63] also notes that "the growth rate of international trade among industrial countries has declined by more than half since the inception of floating rates."
Studies by Rose [1999], Dell' Ariccia [1999], Chowdhury [1993], Cushman [1988], Thursby and Thursby [1987], and Kenen and Rodrik [1986], among others, have provided empirical evidence for developed countries, and most conclude in favor of the existence of a negative and statistically significant long-run equilibrium relationship between exchange-rate volatility and trade flows. For the less developed countries (LDCs), no similar conclusion has been reached because very few studies [Goes, 1981; Brada and Mendez, 1988; Caballero and Corbo, 1989; Arize et al., 2000] exist due to unavailability of sufficient time series data. Nevertheless, whether a high degree of exchange-rate variability has impact on foreign trade continues to be an important question in most LDCs since it has relevance in decisions concerning the choice of exchange-rate system as well as the conduct of exchange-rate policies.
The purpose of this paper is to investigate empirically the relationship between real exports and their determinants and to examine the constancy of this relationship. The focus is on 10 countries: Burkina Faso, Colombia, Costa Rica, Jordan, Kenya, Korea, Myanmar, Pakistan, South Africa, and Venezuela. Most of these countries have been excluded from previous studies and the sample is reasonably representative of developing countries. The results of this paper should be of interest to many readers because of the cross-country comparisons and because of the important role that exports play in today's economies--witness the discussion about the current Asian financial turmoil. The sample period is 1973:2-1998:1, and the null hypothesis being tested is that exchange-rate volatility has no statistically significant effect on export flows in the short-and long-run.
The paper has three objectives. The first is to determine empirically whether there exists a stationary long-run relationship among real exports, foreign economic activity, relative prices, and exchange-rate volatility. The test used for cointegration is the one proposed in Johansen and Juselius [1990] and extended in Johansen [1992] and Juselius [1992]. The optimality of the Johansen estimation has been shown by Phillips [1991] in terms of symmetry, unbiasedness, and efficiency properties. Monte Carlo studies by Cheung and Lai [1993] and Gonzalo [1994] support the superior properties of the Johansen estimation technique relative to several other techniques.
Another contribution of this study relates to the stability of the cointegrating relationship between export demand and its determinants. In general, most previous studies have presumed (either explicitly or implicitly) that the relationship is stable. It is possible that this may not be the case. There is no reason to believe a priori that the relative importance of factors influencing the relationship between real exports and their determinants has remained unchanged. Following the lead of Haug and Lucas [1996], it is believed that credible evidence of such a relationship should be ascertained, not only by testing for statistical cointegration, but also by investigating whether the cointegrating relationship has been structurally stable over the sample period.
Therefore, the second objective of this study is to provide new evidence on the stability of the cointegrating relationship since "structural instability is another form of nonstationarity." (2) For this purpose, several tests proposed by Hansen [1992a] are employed.
The final objective is to determine the dynamics of the short-run relationship among export demand, foreign income, relative prices, and exchange-rate volatility. In a policy sense, the short-run adjustment of export demand to changes in these variables also is frequently important. How quickly real exports respond to changes in their determinants is important for understanding future effects that may occur as a result of changes in trade or exchange-rate policy and for interpreting recent events. Because the usefulness of any estimates of the short-run models hinges crucially on their structural stability, this study also explores the stability properties of the short-run relation by applying the joint parameter nonconstancy (JT), and variance nonconstancy (Var) tests for the nontrending process suggested by Hansen [1992b].
The remainder of the paper is organized as follows. The next section describes the export demand model. Section three provides data definitions and sources. Section four reports the empirical results, and concluding remarks close the paper.
Model Specification and Theoretical Considerations
A traditional specification of the long-run equilibrium export demand in the flexible exchange-rate environment is that of Arize [1995] and Chowdhury [1993]:
[Q.sup.d.sub.t] = [[tau].sub.0] + [[tau].sub.1] * [w.sub.t] + [[tau].sub.2] * [p.sub.t] + [[tau].sub.3] * [[sigma].sub.t] + E[C.sub.t], (1)
where [Q.sup.d.sub.t] denotes the logarithm of desired volume of a country's export goods; Wt is the logarithm of a scale variable that captures world demand conditions; [p.sub.t] is the logarithm of relative prices and is measured by the ratio of that country's export price in U.S. dollars to the world export price in U.S. dollars; [[sigma].sub.t] is the logarithm of a moving-sample standard deviation ([J.sub.t+m]); and E[C.sub.t] is a disturbance term.
If foreign economic activity rises, the demand for exports will rise, so [[tau].sub.1] is expected to be positive. On the other hand, as relative prices rise, the demand for exports will fall, so [[tau].sub.2] is expected to be negative. Most empirical work treats exchange-rate volatility as a risk: higher risk leads to higher cost for risk-averse traders and also to less foreign trade. This is because the exchange rate is agreed on at the time of the trade...
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